Taylor’s post on past performance
Many of the fund ratings (aka ‘STARS’) are awarded to funds based on their past three- or five-year performance. Is it a good idea to select funds based solely on their past-performance? The following is an edited version of Talyor’s post in the Diehards forum (53457) on this issue.
Selecting funds solely on the bases of past-performance is nearly always a mistake. “Low cost” is a much better predictor. This is what investment experts say:
“Top Performance lists are dangerous.” (AAII Guide to Mutual Funds)
“Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea.” (Bill Schultheis, The Coffeehouse Investor)
“Nothing is as futile as expecting past returns to be slavishly translated into future returns on a linear basis.” (Jack Bogle in Common Sense on Mutual Funds)
“For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade.” (Bill Bernstein in Four Pillars of Investing)
“Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998.” (Gensler & Baer in The Great Mutual Fund Trap)
“Rating services such as Morningstar’s star awards or the ‘Forbes Honor Roll’ attest to the futility of applying past peformance to tomorrow.” (Frank Armstrong in The Informed Investor)
“Buying funds based purely on their past performance is one of the stupidest things an investor can do.” (Graham/Zweig in The Intelligent Investor)
“Again and again yesterday’s star fund has proven to be today’s disaster.” (Burton Malkiel in Random Walk Down Wall Street)
“I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.–There is no persistency to good performance. It is as random as the market.” (Burton Malkiel in Random Walk Guide)
“If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail.” (Larry Swedroe in Rational Investing in Irrational Times)
“Fund rankings are meaningless when based primarily on past performance, as most are.” (Jack Brennan in Straight Talk on Investing)
“The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980’s losing 73%.” (Larry Swedroe in The Successful Investor Today)
“A mutual fund’s past performance, which is the first feature that investors consider when choosing a fund, doesn’t predict future performance.” (Arthur Levitt in Take on the Street)
“Extensive studies by Davis, Brown & Groetzmann, Ibbotson Groetzman, and Elton et al, all confirmed there is no significant persistance in mutual fund performance.” (Ron Ross in The Unbeatable Market)
“By the time an investment reaches the top of the performance tables, there’s a good chance that its run is over. The past is not prologue.” (Andrew Clarke in Wealth of Experience)
“Numerous studies have shown that using superior past performance is no better than random selection.” (Tweddell and Pierce in Winning with Index Mutual Funds)
“Trying to pick market-beating investments is a loser’s game.” (Jonathan Clements in You’ve Lost It. Now What?)
“If you look at the top 20 U.S. equity funds during the 10 years through 1993, only one stayed in the top 100 in the subsequent 10-year period.” (Catherine Gordon, Vanguard)
“Just because last year’s hot performer seems like a hot performer today, there’s a downside to that. It can be deadly to your financial planning.” (Lipper)
“If you had invested in the annual #1 top performing stock and bond funds over the last 15 years, 80% of those top performers subsequently performed worse, over the next 3-10 years, than the average fund in their peer group.” (Eric Tyson, author of Investing for Dummies)
Stumble it!
